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Find a numerical value for n

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Reference no: EM132543972

You are a bond portfolio manager at Blackrock and the investment committee has asked you to buy a bond with price B1 and sell short a certain quantity N of a second bond with price B2:

-The bond with price B1 is a 1-year zero coupon bond with a yield-to-maturity y1= 1%

-The bond with price B2 is a 2-year zero coupon bond with a yield-to-maturity y2= 2%The resulting portfolio value is Π = B1 - N*B2

You are asked to choose N to optimally hedge the interest rate exposure of the portfolio Π
and thus minimize its sensitivity to interest rate changes.

Find a numerical value for N, rounding your answer to 4 decimal places.

Reference no: EM132543972

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